Christen Granite sells granite counter tops to the construction industry. Christen Granite has three customers: Homebuilders, a small construction company that builds private luxury homes; Kitchen Constructors, a company that designs and builds kitchens for hospitals and hotels; and Subdivision Erectors, a construction company that builds large subdivisions in major metro suburbs. Following are Christen Graniteâs revenue and cost data by customer for the year ended December 31, 2016:
Operating costs include order processing, sales visits, delivery, and special delivery costs. Christen estimates that revenue and costs will increase as follows on an annual basis:
Required: 1. Calculate operating income per customer for 2016 and for each year of the 2017â2021 period. 2. Christen estimates the value of each customer by calculating the customerâs projected NPV over the next five years (2017â2021). Use the operating incomes calculated above to compute the value of all three customers. Christen uses a 10% discount rate. 3. Recently, Kitchen Constructors (KC), Christenâs most valuable customer, has been threatening to leave. Lawson Tops, Christenâs fiercest competitor, has offered KC a greater discount. KC demands a 20% discount from Christen if the latter wants to keep KCâs business. At the same time, Christen reevaluates the KC account and anticipates annual revenue increases of only 5% thereafter. Should Christen grant KC the 20% discount? What is the five-year value of KC after incorporating the 20% discount? What other factors should Christen consider before making a final decision? 4. What are the possible adverse effects of caving in to KCâs pressure?
Kitchen Subdivision Homebuilders Constructors Erectors Revenues $54,000 $390,000 $1,032,000 Cost of goods sold 26,400 216,000 660,000 Operating costs 12,000 90,000 282,000 Kitchen Subdivision Homebuilders Constructors Erectors Revenues 5% 15% 8% Cost of goods sold 4% 4% 4% Operating costs 4% 4% 4%